Explosion of inequality? Depends on how you look at it.

Fantastic new study from the AEI looks at consumption.. you know, the stuff we buy and use every day, and finds things haven’t changed much in the last 20 years, and in fact, we’re all richer.

First, instead of looking at income inequality, Hassett and Mathur look at consumption inequality, which represents a broader look at the economic resources a person can summon. Looking just at income ignores how individuals are generally able to smooth consumption by borrowing in the low-income years — such as during retirement or when they are just entering the workforce — and saving in the high-income years. Studies of income alone often exclude things like Social Security, Medicare, and food stamps.

Additionally, tax return data of the sort Piketty and Saez discuss can be influenced by changes in tax rates, giving a highly distorted picture of income inequality. For example, the personal tax rate reductions of the 1980s and the early 2000s caused businesses to shift income out of the corporate form and into the personal tax, thus raising reported incomes at the top.

So what does the consumption data tell us?

In 1984, households in the top income quintile, or top 20%, accounted for 37% of total consumption spending. Households in the bottom quintile accounted for only 10 percent of total spending. So the ratio of top-to-bottom consumption was approximately 3.8.

By 2010, that ratio had increased to just 4.4. This hardly represents an explosion in inequality. As measured by this ratio, consumption inequality has increased marginally over time, averaging 4.21 between 1984 and 1990, 4.29 between 1991 and 2000, and 4.46 between 2000 and 2010.

The graphs and charts tell quite a story, but not the narrative politicians want you to hear (click to enlarge):

I often mention seeing folks paying for food with “Independence” cards at the local grocery store while talking on an iPhone.  Those people are far richer than the poor of 20+ years ago.  Maybe we need to look at why they are richer now, instead of using force to take my stuff.

 

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About Paul Stagg

Husband, lifter, MBA in Baltimore, MD. Will post about Powerlifting, politics, Classical Liberalism, Economics, building wealth, self improvement, productivity, heavy music, wine, food, beer, and almost anything else. View all posts by Paul Stagg

8 responses to “Explosion of inequality? Depends on how you look at it.

  • Justin M.

    Interesting read and some good points. Any insight into the absolute level of consumption, in real terms, for the bottom quintile and bottom 10%?

  • Justin M.

    And also, when I read these articles, am I to assume you are purely objective, or are you using the data factually in a way that supports your point? For example, if we changed the percentiles to top 5% or top 1% or top 10%, would we see a much bigger difference than we expect? Also, what is the income ratio between the original groups?

  • Paul Stagg

    I am certainly not objective. I think the use of force to take my property is wrong regardless of the virtue of its use.

    The info is directly from the study, the linked article doesn’t say anything about absolute spending. I’d suggest it doesn’t really matter much, the ratio and percentages tell the story. The income ratio doesn’t matter, that’s the point.

    I also think the more important point is how much richer people are because of the increases in productivity/decreases in relative prices for what were once luxury items.

    How many poor people have cell phones? My first cell phone (in the early/mid ’90s) cost $200, $40/month, $.25 per minute. No texting, no unlimited minutes, no data, no email, no calendar function. I don’t even think it had an address book function (you actually had to know the person’s number and dial it!) Now, you can get an iPhone. How many poor people have TVs? I bought a small flat screen HD television for less than I paid for a 19 inch color TV in 1992. How many poor people have cable, DSL, HD, DVR, etc? Poor people 50 years ago didn’t have a TV. I knew kids in high school who didn’t have a home phone because they couldn’t afford it.

    Now?

    Much of the point of this is that the income gap doesn’t matter. What matters is that *everyone* is richer if you look at consumption. And that’s a good thing.

    Do you care if I’m richer than you? Or do you only want everyone better off? I’m in the latter camp – I want the people richer than me to get richer, and I want people poorer than me to get richer. I don’t care if the rich people get richer than the poor people – it doesn’t matter. What matters is many in the bottom quintile have more choices and better lives today than they did yesterday.

    • Justin M.

      That was the point that I know the data shows!

      I think it is interesting that: a) although the income ratio is about ~9:1 and expanding slightly (estimate), the consumption ratio is only 4:1 and has not changed much; and b) in absolute terms, the poorest are becoming richer (and are benefiting hugely from technological advancements), so that should make folks happy.

      • Paul Stagg

        And what most people who want to make income the issue miss is what the evil rich people do with the income they are not spending. They are investing in all the companies that make life so much better for those folks in the bottom!

        Taking that from them and having the government direct it, above being immoral, doesn’t work. How long ago did the war on poverty start? 50 years ago? What have they accomplished other than creating a dependent class?

      • Paul Stagg

        Good to talk to you, by the way. How’s life? Still liftin?

  • Justin M.

    Life is good. I’ve been switching between a couple of interesting non-legal projects (with McKinsey and then a marketing company that actually works with Coke) after deciding that the legal market is not the place for me to be right now. Anyway, I am finally about to start a full-time job with AT&T Supply Chain on Monday. Looking to purchase a home in Atlanta very soon.

    Lifting was pretty pathetic over the last year because my hours have been so bad, but I have been focused again on the powerlifts over the last month. Hopefully that keeps up. I saw you’re getting into real estate. How is everything else going?

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